Understanding Investment Risk

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All content is based on publicly available information from government and institutional sources.

Risk is perhaps the most misunderstood concept in investing. Many people equate risk with the possibility of losing money, but in finance, risk has a more nuanced meaning: it's the uncertainty of returns and the possibility that actual results will differ from expected results.

For older Canadians, understanding and managing risk isn't just an academic exercise—it's essential for preserving the wealth you've spent decades building while still generating the returns you need for a comfortable retirement.

Volatility Risk

Short-term fluctuations in investment value. A portfolio might drop 20% in a market crash but recover over the following years.

Permanent Loss Risk

The risk of permanently losing capital—for example, if a company you've invested in goes bankrupt.

The Real Risk for Retirees

For retirees, the biggest risk often isn't market volatility—it's running out of money. Being too conservative can be just as dangerous as being too aggressive if your portfolio doesn't keep pace with inflation over a 25-30 year retirement.

Types of Investment Risk

Investors face multiple types of risk. Understanding each helps you make informed decisions about how to structure your portfolio.

Market Risk

The risk that the entire market declines. Even diversified portfolios can't completely avoid market risk. In 2008, almost everything dropped. In 2020, the COVID crash affected all sectors briefly.

Inflation Risk

The risk that your purchasing power erodes over time. If inflation is 3% and your investments return 2%, you're actually losing ground. This is why even conservative investors need some growth-oriented holdings.

Interest Rate Risk

When interest rates rise, existing bond prices fall. A bond paying 3% becomes less valuable when new bonds pay 5%. Longer-duration bonds are more sensitive to rate changes.

Concentration Risk

Having too much in one stock, sector, or country. If 50% of your portfolio is in Canadian banks, a banking crisis could devastate your wealth.

Sequence of Returns Risk

Poor returns early in retirement can permanently damage your portfolio when combined with withdrawals. This is why the first 5-10 years of retirement are crucial.

Longevity Risk

The risk of outliving your money. A 65-year-old Canadian has about a 50% chance of living past 90. Your portfolio needs to last potentially 25-30+ years.

Assessing Your Risk Tolerance

Risk tolerance is your emotional and psychological ability to handle investment volatility. It's how you feel when markets drop 20%—can you sleep at night, or do you panic and sell?

Risk Tolerance Questions

Consider how you would honestly react to these scenarios:

Your portfolio drops 20% in one month. Do you: sell everything to stop the bleeding, hold steady and wait for recovery, or buy more while prices are low?
You see a "hot" stock tip from a friend. Do you: invest a significant amount hoping to get rich quick, ignore it entirely, or research it thoroughly before considering a small position?
The market has been dropping for 6 months. Do you: check your portfolio daily and worry constantly, review quarterly and trust your strategy, or see it as an opportunity?

Risk Tolerance Profiles

Profile	Characteristics	Typical Allocation
Conservative	Prioritizes capital preservation, uncomfortable with volatility	20-30% stocks, 70-80% bonds/GICs
Moderate	Accepts some volatility for better returns	40-60% stocks, 40-60% bonds
Aggressive	Comfortable with significant swings for growth potential	70-80% stocks, 20-30% bonds

Be Honest With Yourself

Many investors overestimate their risk tolerance during bull markets and underestimate it during bear markets. Think about how you actually behaved during past market drops (2008, 2020, 2022), not how you think you should behave.

Risk Capacity vs Risk Tolerance

Risk capacity is different from risk tolerance—it's your financial ability to absorb losses without impacting your lifestyle. You might have a high risk tolerance but low risk capacity, or vice versa.

High Risk Capacity Indicators

Multiple income sources (CPP, OAS, pension, part-time work)
Low fixed expenses relative to income
Significant assets beyond your investment portfolio (e.g., home equity)
No dependents relying on your income
Long time horizon despite your age

Low Risk Capacity Indicators

Investment portfolio is your primary income source
High fixed expenses that can't be reduced
Health issues that may require significant spending
Supporting dependents (spouse, adult children, grandchildren)
Little or no emergency savings outside investments

Your Strategy Should Reflect Both

Your investment strategy should be based on the lower of your risk tolerance or risk capacity. If you have high tolerance but low capacity, you must invest conservatively to protect your financial security.

Managing Risk Effectively

You can't eliminate risk entirely, but you can manage it effectively through several proven strategies:

1. Diversification

Don't put all your eggs in one basket. Spread your investments across:

Asset classes: Stocks, bonds, GICs, possibly real estate
Geographies: Canada, US, international developed, emerging markets
Sectors: Financials, energy, technology, healthcare, utilities
Company sizes: Large-cap, mid-cap, small-cap

2. Asset Allocation

The mix between stocks and bonds is your primary risk control lever. More bonds = less volatility but lower expected returns. Adjust this based on your risk tolerance and capacity.

3. The Bucket Strategy

Divide your portfolio into three "buckets":

Bucket 1: Safety

1-2 years expenses in cash/GICs

Bucket 2: Income

3-7 years in bonds/dividend stocks

Bucket 3: Growth

Remainder in diversified equities

4. Regular Rebalancing

At least annually, rebalance your portfolio back to your target allocation. This forces you to sell high (winners) and buy low (underperformers), systematically reducing risk.

Age-Appropriate Risk Strategies

As you age, your investment strategy should evolve. Here's a framework for thinking about risk at different life stages:

Ages 50-59: Pre-Retirement

You still have time to recover from setbacks but should begin reducing risk. Consider moving from 70-80% stocks to 50-60% stocks. Focus on paying off any remaining debts and maximizing retirement contributions.

Ages 60-69: Transition Years

The most vulnerable period for sequence of returns risk. Consider reducing to 40-50% stocks. Build up 2-3 years of expenses in safe investments. Begin thinking about withdrawal strategies.

Ages 70+: Retirement

Focus on capital preservation and income generation, but don't eliminate stocks entirely—you may have 20+ years ahead. A 30-40% stock allocation is often appropriate. Consider guaranteed income products like annuities for a portion of your portfolio.

It's Personal, Not Prescriptive

These are guidelines, not rules. A healthy 75-year-old with a pension, plenty of savings, and a long-lived family might appropriately hold more stocks than a 60-year-old with health issues and no pension.

Investing for Peace of Mind

Ultimately, the goal isn't to maximize returns—it's to achieve your financial objectives while sleeping well at night. Here are our final recommendations for peace of mind:

Never invest more in stocks than you can afford to see drop 50%. If a 50% drop in your stock allocation would ruin your retirement, you own too much stock.
Keep 1-2 years of expenses completely safe. GICs and high-interest savings accounts for near-term needs mean you'll never have to sell stocks during a downturn.
Automate everything. Automatic withdrawals, automatic rebalancing, automatic dividend reinvestment (or not) reduces stress and emotional decision-making.
Turn off the financial news. Daily market updates create anxiety without providing useful information for long-term investors.
Review annually, not daily. Set a date each year to review your portfolio and make adjustments. Then don't look until next year.

The Best Risk Management

The best way to manage risk is to have a written investment plan and stick to it. When you know why you own what you own and have predetermined how you'll respond to market drops, you're far less likely to make costly emotional decisions.

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Sources Referenced

The educational information in this guide is based on publicly available resources from official Canadian institutions:

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About Maple Wealth Guide

Maple Wealth Guide is an educational publication that explains investment concepts, retirement-related topics, and personal finance information for Canadians aged 50 and over. We are not licensed financial advisors and do not provide personalized recommendations. All content is for educational purposes only.

Non-Affiliation Statement: Maple Wealth Guide is not affiliated with any banks, brokerages, investment platforms, or government agencies.

Risk Explained: How Older Canadians Can Invest Safely

Educational Disclaimer